LIQUIDITY or “I Don’t Want to Tie Up My Money”

By: John Mar, Licensed Annuity Advisor

It is an obvious truism.  Annuity advisors sell annuities.  Considering all of the guaranteed benefits annuities provide, one would think that every client we encounter would always make a purchase.  After all, fixed and fixed index annuities provide enormous advantages.

Fixed and Fixed Index Annuities:

  • Are 100% safe
  • Provide guaranteed growth
  • Guarantee no loss of principle and interest earned
  • Grow tax deferred
  • Provide income for life
  • Provide a benefit for heirs
  • Have multiple crediting strategies which enable maximum growth
  • Are placed with the industry that specializes in financial protection

Yet, despite all of these guaranteed advantages, some clients elect not to purchase an annuity and say “no” to the advisor.  If fixed and fixed index annuities perform so well with all of these advantages, and since some clients still do not purchase, it begs to ask the question…… “WHY?”

Admittedly, it is a perplexing conundrum for the advisor.  After all of the wondering by the advisor, after all of the soul searching, after all of the minor peripheral reasons why the client did not purchase are peeled away, it comes down to only one true answer.  The answer is:  LIQUIDITY.  Even more to the point, it is the perceived lack of liquidity.  From the perspective of the client, a more succinct way of framing it is “I don’t want to tie up my money.”

The final answer is clients do not purchase because of a perceived lack of liquidity.  Please note, I used the word “perceived” lack of liquidity because we have two issues to explore with the conversation of liquidity.

Everyone has a perception of his or her money when it comes to liquidity.  Do you perceive you need access to 100% of your money because you anticipate a future expenditure that will require a large portion or all of your cash assets?  On the other hand, do you perceive you need liquidity because you are concerned there may be some emergency that will require the use of most or all of your cash assets?  It is essential to have a frank and honest exploration of those questions to understand how much liquidity is truly necessary for your financial situation.

There is no standard answer, as everyone’s financial condition is different.  But a question to ask is are you not purchasing a valuable financial product like annuities because you have a perceived fear that your money is tied up when in reality, it provides you an assortment of liquidity flexibility and options?

As an advisor, in order to provide the best consultation, at the minimum, it is important to understand these two liquidity questions of the client.

They are:

  1. Mr./Ms. Client, do you need 100% liquidity of your money within 7 – 10 years?
  1. Mr./Ms. Client, do you need 100% liquidity of your entire financial estate?

Question #1:

If the answer to that question is “yes” and you truly need access to the entire amount you are considering for an annuity, annuities are probably an inappropriate product and definitely not for you.  For example, if a client were to explain that they have $200,000 earmarked for an annuity purchase but they also intend to use the $200,000 to make a lump sum cash payment on income property in 2 – 3 years.  In this scenario, it is important the client understands annuities are not a viable option for them as the need for cash liquidity is essential.  However, if they have $600,000 in financial assets, and they want to purchase a $200,000 annuity now and income property in 2 – 3 years, then we can continue talking.  In this scenario, they still have $400,000 in liquid assets that will enable them to make a $200,000 cash purchase of the income property.

It is important to note that almost all fixed and fixed index annuities enable a 10% free annual withdrawal of the entire account value.  They can do this every year throughout the surrender period.  For example, if your annuity has an account value of $250,000, then a cash withdrawal of $25,000.00 is available without any penalty, fees, or cost.  The 10% free withdrawal is available every year during the surrender period, which is usually 7 to 14 years for most annuities.  When the surrender period has expired, then you have 100% unrestricted access to entire account value money.  That means you can withdraw any amount, whenever you want, without any penalty, fee, or costs.

In addition, there is an “A” rated company, which provides a free withdrawal of your entire initial premium without any penalty, fees, or costs.  For example, if you buy an annuity with $100,000, at any time, you can withdraw the entire $100,000 and do so free of any penalty, fees, or costs.

Question #2:

“I’m sorry, but I’ve decided not to buy an annuity.”  As an advisor, this is a client statement we live with and the final answer that is a frequent reality.  Over 90% of the time, the real reason the client elects not to purchase is that they do not want to tie up their money.  The client’s perceive the need to have access to most of all of their money in case of unanticipated emergency.  The clients are not wrong, either.  They are absolutely correct too and every one of the reasons they give COULD happen!  However, realistically, what are the percentage chances that their fearful reasons are likely to occur?

We all know, other than the old adage of death and taxes, in life there are no 100% absolute guarantees of anything!  Everything we do is a measurement of risk.  We could slip in the shower and injure ourselves but we still take showers.  We could be hit by a tomato truck while walking on a sidewalk, but we still venture outdoors.  All of these things could happen but we still go about living our lives.  When a client elects not to take advantage of all of the enormous advantages of the safety and guarantees of annuities, it is almost always because they are afraid of some unlikely and unrealistic future financial Armageddon scenario.  Unfortunately, when clients reason some infinitesimally small chance of a perceived unlikely emergency will require the use of all of their annuity money, they may be doing more harm to themselves than good.

With rare exception, you would never devote 100% of your money into an annuity.  Fixed and Fixed Index Annuities have many positive benefits!  Even still, with all of the inherent built in safety and guarantees, it is still prudent to have diversity in your financial portfolio.  It is wise to have a mixture of cash savings with a bank, stocks, bonds, and annuities.  Again, annuities should be a part of your portfolio, and not 100% of your portfolio.  How much you allocate to an annuity is based on your age, income, risk tolerance, other cash assets, and other factors.  Consequently, in the very remote possibility that a client would have a financial meltdown that would require utilizing all of their money, they would access more liquid assets first.  Bank savings, stocks (or mutual funds), and bonds would be in order the first assets targeted for liquidation.  If necessary, annuities would be the last asset to liquidate into cash.  The good thing about annuities, that if this kind of financial emergency were to occur, it probably is because you are facing a life ending medical condition.  In that case, almost all fixed and fixed index annuities allow access to 100% of the monies free of any penalty, fees, or cost!

These are examples of why it is vital to thoroughly explore and understand the perceived need for liquidity versus a real need for liquidity.  So often clients miss out on the enormous benefits of annuities, because they harbor an unrealistic perceived need to have access to all of their cash.  Guaranteed growth, safety, and other benefits are lost when in reality only a much smaller margin of safe access is needed to their cash assets. 

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